Central Banks Drop Tightening Talk as Easy Money Goes On

The Canadian flag flies outside the Bank of Canada building in Ottawa, Ontario, Canada. Photographer: Patrick Doyle/Bloomberg

Oct. 24 (Bloomberg) -- The era of easy money is shaping up
to keep going into 2014.

The Bank of Canada’s dropping of language about the need
for future interest-rate increases and today’s decisions by
central banks in Norway, Sweden and the Philippines to leave
their rates on hold unite them with counterparts in reinforcing
rather than retracting loose monetary policy. The Federal
Reserve delayed a pullback in asset purchases, while emerging
markets from Hungary to Chile cut borrowing costs in the past
two months.

“We are at the cusp of another round of global monetary
easing,” said Joachim Fels, co-chief global economist at Morgan
Stanley in London.

Policy makers are reacting to another cooling of global
growth, led this time by weakening in developing nations while
inflation and job growth remain stagnant in much of the
industrial world. The risk is that continued stimulus will
inflate asset bubbles central bankers will have to deal with
later. Already, talk of unsustainable home-price increases is
spreading from Germany to New Zealand, while the MSCI World
Index of developed-world stock markets is near its highest level
since 2007.

‘Go Wild’

“We are undoubtedly seeing these central bankers go
wild,” said Richard Gilhooly, an interest-rate strategist at TD
Securities Inc. in New York. They “are just pumping liquidity
hand over fist and promising to keep rates down. It’s not
normal.”

Normal or not, that’s been the environment now for five
years after monetary authorities fought to protect the world
economy from deflation and to hasten its recovery. In the
advanced world, central banks drove interest rates close to zero
and ballooned their balance sheets beyond $20 trillion through
repeated rounds of bond purchases, a policy known as
quantitative easing.

The economic payoff has been limited. The International
Monetary Fund this month lopped its forecast for global economic
growth to 2.9 percent in 2013 and 3.6 percent in 2014, from
July’s projected rates of 3.1 percent this year and 3.8 percent
next year. It also sees inflation across rich countries already
short of the 2 percent rate favored by most central banks.

Central bankers are on guard to keep low inflation from
turning into deflation, a broad-based decline in prices that
leads households to hold off purchases and companies to postpone
investment and hiring.

‘False Start’

“There is a concern at central banks that what we’re
seeing is another false start in their economies,” said Michala
Marcussen, global head of economics at Societe Generale SA in
London. “We now need to see two to three months of better
numbers before they’re willing to contemplate an exit again.”

After flirting for months with the idea of curtailing
stimulus, the Fed said in September it would continue purchasing
$85 billion of bonds a month, citing the need to see more
evidence that the U.S. economy will improve.

That came less than two weeks before a 16-day U.S.
government shutdown that postponed releases of key data the Fed
is relying on to guide its policy decisions. The Fed’s strategy
also took a hit from this week’s news that employers added fewer
workers to payrolls than projected in September.

The Fed will wait until March before slowing the pace of
its third round of quantitative easing, according to the median
estimate of economists in an Oct. 17-18 Bloomberg survey.

Same Place

‘If you look at where we are economically, versus where we
were a year ago, we’re virtually in the exact same place,” Gary
D. Cohn, president of Goldman Sachs Group Inc., said yesterday
in a Bloomberg Television interview with Stephanie Ruhle. “So
if quantitative easing made sense a year ago, it probably still
makes sense today.”

That leaves central banks elsewhere likely to maintain a
bias toward easing. Moving to tighten before the Fed is ready to
do so would drive up currencies against the dollar, to the
detriment of exports, said Derek Holt, vice president of
economics at Bank of Nova Scotia in Toronto.

The Bank of Canada, citing “uncertain global and domestic
economic conditions,” yesterday omitted language it used in
previous decisions referring to the expected “gradual
normalization” of its benchmark rate, now at 1 percent.

‘Low Level’

The Riksbank kept its rate at 1 percent today and said it
sees it at 1.15 percent in the fourth quarter next year, versus
1.25 percent in September. “The repo rate needs to remain at
this low level until economic activity is stronger and inflation
rises,” it said. Norway left its benchmark rate at 1.5 percent
today, a month after signaling it will move toward tighter
policy as house prices and consumer debt hover at record levels.

The Philippines also held its rate at a record low 3.5
percent to support Southeast Asia’s fastest growing economy as
inflation stays within the central bank’s targeted range.

“There’s an easy-money bias across global central banks
that probably will persist until about March or April,” said
Holt. “The Fed’s decisions complicated the exit strategies for
a lot of central banks.”

If the Fed’s delay extends the decline in the dollar, then
the Bank of Japan and the European Central Bank also are more
likely to add fresh stimulus, Fels said in an Oct. 20 report.
The ECB is likely to offer banks another round of cheap, long-term loans in the first quarter, while the BOJ may ease more to
offset a 2014 consumption tax increase, Citigroup Inc.
economists said in a report yesterday.

Emerging Markets

The dollar has declined 1.1 percent against a basket of 10
leading global currencies in the last month, according to the
Bloomberg U.S. dollar index.

Some central banks in emerging markets are already acting.
Chile unexpectedly lowered its benchmark rate by a quarter point
to 4.75 percent on Oct. 17, pointing to weaker growth, inflation
and the global outlook. Israel surprised analysts on Sept. 23
when it cut its key rate a quarter point to 1 percent, the
lowest in almost four years.

“With the dollar much weaker in recent days and weeks,
you’ll see central banks that were reluctant to ease start to do
that now,” said Thierry Wizman, global interest rates and
currencies strategist at Macquarie Group Ltd. in New York.
“They can be less worried about capital flight if the Fed isn’t
tightening policy, and the strength in their currencies is
probably imparting some disinflation into their economies,
giving them a window to cut rates.”

Forward Guidance

Hungary, Latvia, Romania, Serbia, Sri Lanka, Egypt and
Mexico have also eased since the start of September although
Indonesia, Pakistan, Uganda and India tightened, with the latter
softening the blow by relaxing liquidity curbs in the banking
system at the same time. Chinese policy makers have also been
draining cash from the financial system.

Even those central banks with limited room to act are using
so-called forward guidance to deter investors from betting on an
imminent increase in rates. The ECB vows to keep its main rate
at 0.5 percent for an “extended period” and the Bank of
England is pledging to maintain its benchmark at the same level
at least until unemployment falls to 7 percent, which it doesn’t
expect to happen for three years. The Bank of Japan is trying to
expand its monetary base by 60 trillion to 70 trillion yen ($720
billion) to bring inflation up to 2 percent.

Fed Policy

The Fed also depends on forward guidance as a policy tool.
Officials have repeated in every policy statement since December
that their target interest rate will remain near zero “at least
as long as” unemployment exceeds 6.5 percent, so long as the
outlook for inflation is no higher than 2.5 percent.

“It’s hard to look around and see much changing on the
rate front,” said David Hensley, director of global economic
coordination at JPMorgan Chase & Co. in New York, who forecasts
the average interest rate in developed economies to hold close
to the current 0.40 percent for another year.

The cheap cash may come at a price that policy makers will
have to pay later if it inflates asset bubbles. Germany’s
Bundesbank said this week that apartments in the country’s
largest cities may be overvalued by as much as 20 percent. In
the U.K., BOE officials are rebutting suggestions of a housing
bubble. Asking prices in London jumped 10.2 percent in October
from the prior month, Rightmove Plc said Oct. 21.

BOE Governor Mark Carney today unveiled a revamp of the
central bank’s money-market operations to widen access and cut
the cost of liquidity insurance to the financial system. The BOE
will expand the range of collateral it accepts in its facilities
and offer money for longer periods on cheaper terms, Carney said
in a speech in London.

Cool Demand

Swedish and Norwegian property markets are also proving a
concern to their central bankers, and policy makers in New
Zealand and Singapore have already sought to cool demand.
Meantime, U.S. stocks are heading toward the best year in a
decade with about $4 trillion added to U.S. share values this
year.

“The bubble conditions are going to remain in place,”
Michael Ingram, a market strategist at BGC Partners LP in
London, told Bloomberg Radio’s Bob Moon yesterday. “We could
well see further stimulus.”

For now, such concerns are being overridden by a need to
enhance economic expansion. The U.S. unemployment rate, at 7.2
percent in September, is still only the lowest since November
2008 and joblessness is 12 percent in the 17-nation euro area.

“Whatever their official mandates, central bankers are
supposed to safeguard a nation’s real income,” Karen Ward,
senior global economist at HSBC Holdings Plc in London, said in
an Oct. 21 report. Labor markets from the U.S. to U.K. suggest
“we shouldn’t fear a rapid withdrawal of global liquidity any
time soon.”